Personal Debt and 401K Plans

 

Retirements saving plans are extremely important for long term financial security. Consistently investing money throughout the course of one's life is the best way to ensure that adequate funds will be available when retirement rolls around. People are not interested in the prospect of living off of credit or running up debts which may cause them to delay or postpone their retirement plans. Participation in savings plans has become very common in recent years and one of the most popular long term investment vehicles is the 401K.

A 401K is an investment plan that is offered through an individual's employer. These investments are subject to some excellent tax advantages. The invested amounts are not counted as taxable income and earnings on the money grow on a tax deferred basis. Another great benefit that is often associated with 401ks is matched employer contributions. Many employers will match an individual's investment up to a certain percentage of their pay. This gives the employee the opportunity to receive "free money". These advantages have resulted in nationwide participation in 401K plans.

If your employment is terminated, here are some options. Cash out your investment is one, but generally not the best choice to make since you are subject to a 10% penalty if you are under 59 ˝. Additionally, your employer can remove 20% of the distribution total as pre-payment of federal income tax. People who cash out their plans are often tempted to spend the money which defeats its intended purpose. Keep in mind the reason you began the plan originally was to prepare for your future retirement.

Another option is to leave the money where it is subject to the existing plan guidelines but you are able to continue taking advantage of the tax advantages. However, the employer will no longer match funds. Also, if your total amount is under $5,000 your employer has the right to make you leave the plan. The best option is to roll over into new employer's plan. You are not subject to any rollover penalties and will enjoy the same tax advantages. Another is and IRA and again, you are not subject to any penalties and you have the same great tax benefits plus you also have much greater flexibility in where to invest your money.

Think about an indirect rollover which involves cashing out all or a segment of the investment and then rolling over all or some of the money into an IRA or into the new employer's 401K plan. The money that is not kept will be subject to taxation and may qualify for the 10% early withdrawal penalty. If you decide to roll over 100% of the money then the 20% that was withheld needs to be reimbursed through personal funds.

If you find yourself contemplating a job change, study all of the alternatives surrounding your 401K. Everybody has different circumstances in their lives but we all have one thing in common - the need to prepare for your future. Good financial decisions now can lead to a comfortable debt free retirement.

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